Question: Projects A and B, both of equal risk, are mutually exclusive alternatives for expanding Corporations capacity. The firms cost of capital is 13%. The cash
Projects A and B, both of equal risk, are mutually exclusive alternatives for expanding Corporations capacity. The firms cost of capital is 13%. The cash flows for each project are shown in the following table:
| Years | Project A | Project B |
|---|---|---|
| Year 0 | ($80,000) | ($80,000) |
| Year 1 | $15,000 | $15,000 |
| Year 2 | $20,000 | $30,000 |
| Year 3 | $25,000 | $30,000 |
| Year 4 | $30,000 | $30,000 |
| Year 5 | $35,000 | $14,000 |
What is each projects traditional payback period? What is each projects net present value? What is each projects internal rate of return? Which project would you select given the 13% discount rate for both projects? Why? What if the projects were independent, which would you select? Why?
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